Food prices in the drought spotlight

The prices of meat, poultry and dairy products in Russia could rise sharply, due to the drought and spiraling grain prices.

The World Bank is urging nations not to follow Russia's lead with an export ban – saying there is unlikely to be a global re-run of the 2008 food crisis.

Global grain markets factored in drought and fires in Russia, with heavy rains in Europe, to push wheat prices as high as 8 dollars 68 a bushel as Vladimir Putin moved to implement a grain export ban.

The move to protect domestic consumers first is one that the World Bank is urging other nations not to follow – for fears it could renew global food fears.

Despite this, economists such as Karen Ward, Chief Global Economist at HSBC, say that a rerun of the food price scare – which pushed wheat as high as $13.49 in February 2008 is unlikely with demand and supply factors different now.

“In 2007 and 2008, across all the range of commodities, stocks were very low, and we also had very different global demand conditions. The global economy, largely because of emerging markets, were incredibly buoyant. So we had very low supply, very strong demand, and that gave you that combination of rising commodity prices across the whole range of foodstuffs. This time around supply is much better, and obviously, given the financial crisis, globally demand is a lot weaker. So we haven’t got that imbalance between demand and supply that we had over the period in 2007.”

Even with a better supply demand balance globally, the 2008 experience – which saw food riots in Africa and Asia – has governments wary of the role speculation plays in global prices and very sensitive about the need to protect their constituents.

In Russia the government is likely to look for market solutions, unlike 2008 where a price freeze on specific items had a muted effect, according to Sergey Moiseev, Economic Centre Director of the Finance Institute.

“I don't dismiss the possibility of a top limit for prices on crucial food items like bread, butter, milk. The effect of these measures is very limited. That's why there will be no limit for the wide range of goods, due to the fact that 2 years ago when those goods disappeared from shelves, and when prices were unfrozen the prices rebounded.”

Food price inflation is also a key driver of wider inflationary expectations, and Russia has just proven a long term record low inflation rate of 5.5% in July.

The government will be keen to avoid seeing rising food prices play a part in resurrecting the long term economic issue.

However the market backdrop for the short to medium term means it will need to avoid its scaring market signals for agricultural producers and investors – as well as consumers – while setting a path to Russia's longer term agricultural potential.